Tag Archives: Telecom/Technology

article 3 months old

Weekly Broker Wrap: Retail, Energy, Outdoor Media, Banks, Internet Consumers And IVE Group

-Morgans sees upside for ADH, RCG and BBN
-Brace for large energy stock impairments
-Outdoor media outlook remains strong
-Bank risks balanced for 2016
-Data intelligence the next internet frontier

 

By Eva Brocklehurst

Retail Previews

Most retailers enjoyed a buoyant Christmas trading season and Morgans expects first half results will be strong. Where the going is likely to get tough is the second half. The broker is cautious, as FX pressure on costs is expected to peak going into FY17, based on hedging profiles, and the housing market is cooling.

Add to this the volatility in equity markets, with little or no wage inflation and fragile consumer sentiment, and the negatives could outweigh such positives as lower interest rates and fuel prices. Hence, Morgans emphasises earnings certainty is critical in the current market.

Where upside earnings risk among retailers exists, the broker maintains, is with Adairs ((ADH)), RCG Corp ((RCG)) and Baby Bunting ((BBN)). Others the broker believes will perform well in the current market are Burson Group ((BAP)) and Super Retail ((SUL)).

The broker notes Lovisa ((LOV)) and G.U.D. Holdings ((GUD)) have already missed expectations and been treated harshly as a result. The broker suspects Ardent Leisure ((AAD)) is in line for a miss this reporting season, given the prolonged rout in the oil price and the impact on its Main Event business.

Energy Previews

Macquarie suspects the energy sector is in for an ugly impairment cycle, to be witnessed at the upcoming results. Sector earnings are projected to fall 58% year on year. The broker expects the large cap oil stocks, including Beach Energy ((BPT)), will announce aggregate pre-tax impairments totalling US$3.5bn. Reserve downgrades are also possible.

Woodside Petroleum ((WPL)), while sustaining a relatively resilient earnings base, is expected to cut its final dividend with a 60% decline in earnings year on year. Santos ((STO)) is expected to report a 75% fall in 2015 profit and its balance sheet will attract further scrutiny at the results. Oil Search ((OSH)) is expected to report a 21% decline in profit.

Outdoor Media

Outdoor media revenues have grown 13.7% in the year to January and UBS expects the pace of growth could continue, although remains hesitant to infer too much from one month's data. While roadside billboard growth slowed to 6.0%, as it cycled strong comparables, other outdoor placements such as street furniture, taxis, and small formats grew 23%. Transport revenues were up 6% while the retail/lifestyle categories of outdoor media lifted 24%.

Key developments including APN Outdoor ((APO)) securing a long-term partnership with the Australian Olympic Committee. UBS retains a Neutral rating on the stock and considers it fairly valued, although, given the outdoor market trends, earnings risk is to the upside.

Banking Outlook

Earnings momentum is expected to improve to 8.5% growth on average for the major banks in FY16, Deutsche Bank contends. The broker forecasts an expected total return of almost 10%, a rate considered reasonable in a low-growth economy.

A number of regulatory issues were settled in 2015 but there are some outstanding, including the Basel 4 proposals and a firming up of what "unquestionably strong” capital ratios mean. The broker interprets industry commentary so far as suggesting capital requirements will not be lifted beyond the sector's ability to absorb the changes in an orderly fashion.

Asset quality remains an issue and while the non-mining books appear well positioned Deutsche Bank envisages a risk of provisions in the oil & gas sector. Still, the issue appears relatively manageable for the banks. Strong loan growth is considered a positive but does present a challenge, the broker maintains, if the sector chases lending growth too vigorously. Overall, Deutsche Bank considers the risks to the sector evenly balanced.

Internet Consumers

This is the largest global consumer group, with almost half the world's population having access to the internet and two billion smart phone users. Credit Suisse notes, from a macro view, the automation of services is not capital intensive but driven by software innovation. This is likely to restrain consumer prices and jobs and translates to low inflation and rates, at least for the near term.

The broker advises investors to adequately capture the positive and negative impacts of this investment theme. Many companies are taking advantage of the benefits of data mining the cloud and “deep learning” algorithms. For example, the artificial intelligence used to achieve traffic management adaptations is advantageous to Transurban ((TCL)). Brambles ((BXB)) has also invested in trucking technology to establish supply chain efficiencies.

Sydney Airport ((SYD)) delivers tailored content to its mobile app users while Qantas ((QAN)) is collating data from its loyalty program to better understand customers. In health care, the broker notes Capital Health ((CAJ)) is applying deep learning to improve the accuracy of diagnostic imaging.

Even in the currently troubled resources sector there are opportunities to exploit. Woodside has teamed with IBM Watson to transform 30 year of historical data into relevant predictive data that should facilitate faster and better decision making. Other segments well ahead in mining the advantages of the net are the gaming sector, financials and retailers.

Smart meters are moving into the utilities sector and, in this case, the broker suspects new entrants could disrupt the market. For example, Powershop is an online power company which allows consumers to track usage and costs and purchase a combination of products to meet their needs.

Insurers are yet to embrace the opportunity fully, the broker notes, but in embracing big data they should gain a better understanding of their customers and this should contribute to higher selling rates.

IVE Group

IVE Group ((IGL)) has charted a course over the last 20 years towards a diversified marketing and print communications business, away from traditional commercial printing.

Bell Potter expects high single digit earnings growth over the medium term, with organic revenue growth and margin expansion through productivity, workplace efficiencies and further investment in capital equipment.

The company is underpinned by a vertically integrated product and service offering and a unique market position in multiple segments in the print and communications industry. This is aided by a track record of accretive acquisitions. Bell Potter initiates coverage with a Buy rating and $2.62 target.
 

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article 3 months old

Weekly Broker Wrap: Yield, Focus Stocks, Equity Strategy, Travel And NBN

-Macquarie: high quality yield prevails
-Goldman adds MMS, ISD to focus list
-WES, CSR, AZJ more interesting to DB
-Strong inbound tourism growth from China
-NBN connectivity charges in spotlight

 

By Eva Brocklehurst

Yield

Macquarie suspects stronger growth, not higher yields, poses the largest threat to relative performance of Australian yield stocks. If economic growth assumptions are correct, the broker does not expect bond yields will rise enough to unwind the desire for high quality yield.

Still there is a de-rating risk for stocks where earnings growth is not enough to offset a higher cost of capital. These stocks may have been mispriced on questionable dividend or distribution policies and/or may have undergone expansion in multiples even if growth concerns were easing.

The broker does not have a timeframe in mind for a turning point but suspects it is too early to take a strong cyclical view versus a defensive one. In contrast to some, Macquarie is not overly concerned about the risk to bank dividends and would be a buyer on price/earnings expansion, while considering Telstra ((TLS)) has potential to raise its dividend and should be purchased for yield.

In the cases of infrastructure and utilities the broker believes while distribution trends can be maintained valuations are largely borne out and these should be purchased for yield. Energy, materials and domestic cyclicals are expected to take market leadership with the greatest price/earnings expansion in 2016.

Focus List

Goldman Sachs adds McMillan Shakespeare ((MMS)) and Isentia ((ISD)) to its Australia Small & Mid Caps focus list. In November the list was up 1.3% while the ASX Small Ordinaries Accumulation index was flat.

The main performers on the list in November were Costa Group ((CGC)), Blackmores ((BKL)) and Super Retail ((SUL)) which outperformed by 10.3%, 9.5% and 7.7% respectively. The main detractors were 3P Learning ((3PL)), Austbrokers ((AUB)) and Genworth Mortgage ((GMA)), which underperformed 13.5%, 7.9% and 5.9% respectively.

Equity Strategy

Deutsche Bank believes the environment is now more fertile for stock picking. There are fewer macro issues and more space to assess stocks on their merits. The broker runs a simple screen on earnings, valuation and quality metrics.

The names that become more interesting and have not been in the broker's model portfolio include Wesfarmers ((WES)), considered cheap versus history with good momentum, CSR ((CSR)) as its price/earnings ratio is 10x and housing exposure is still attractive, and Aurizon ((AZJ)) as it offers solid growth driven by cost cutting.

With the US Fed funds rate set to rise, Deutsche Bank notes this is positive for QBE Insurance ((QBE)) and Computershare ((CPU)). When it comes to the yield trade the broker does not believe short term rates will rise a lot and long rate may not move much at all. Moreover, the broker does not believe earnings growth is likely to be so robust that yields of 4-5% can be ignored.

Deutsche Bank does not envisage a need to chase traditional yield plays that have already re-rated and offer limited growth such as telcos, real estate investment trusts and infrastructure. Instead, the broker sticks with choosing stocks with yield and some achievable growth, noting yields of more than 5.0% are on offer from CSR, Stockland ((SGP)), Fletcher Building ((FBU)), AMP ((AMP)), Harvey Norman ((HVN)) and Spotless ((SPO)).

High Conviction Stocks

Morgans removes Challenger ((CGF)) and BHP Billiton ((BHP)) from its list of high conviction stocks. The broker notes Challenger has outperformed since being included in the list three months ago, returning 21% in an otherwise volatile market. The stock is now considered fair value but still representing a solid investment in the current climate.

BHP has drifted into oversold territory in the broker's view, following the tragic incident at the Samarco mine, but the stock is considered a long-term investment prospect because of its diversification, operating performance and free cash flow leverage to a recovery.

The broker suggests investors stick to stocks with higher levels of conviction and those that have shown resilience in a rising interest rate environment.

Travel

Inbound tourism for the year to September 2015 grew 6.6% to a new high of 6.7m visitors, Tourism Research Australia has revealed. International visitor spending on trips to Australia grew by 13.5%. Growth was strongest from China, with Chinese visitors now accounting for 22% of total expenditure by international visitors on trips to Australia.

Bell Potter likes Amalgamated Holdings ((AHD)) in this sector given its hotels and resorts are exposed to the Sydney and Melbourne markets, gateways to international visitors. Ardent Leisure ((AAD)) is also considered attractively priced given growth in its Main Event business and exposure to Chinese visitors through its theme park assets.

Corporate Travel Management ((CTD)) is expected to enjoy further share price upside with gains in market share supplemented by acquisitions while the slowing outbound travel and lower currency headwinds that plague Cover-More ((CVO)) are expected to turn around as the domestic economy recovers.

NBN Charges

A spike in data usage with the launch of Streamed Video On Demand (SVOD) has caused the service providers to lobby NBN Co to reduce the current charges for the connectivity virtual circuit (CVC). This is the capacity required to serve a collection of end user premises as defined by NBN Co. NBN Co has commenced an industry consultation process on the issue.

The current charge for CVC is $17.50/month/mbps. Speculation suggests the NBN will trial a new dimension based discount which would scale up with the amount of CVC capacity provided to the end user by the service provider and would not disadvantage smaller players.

Savings would depend on how much CVC capacity is currently provided per end user. UBS considers the implementation of new pricing could result in NBN cost savings per user of $1.30 a month.

Despite this development, the broker still believes the NBN is a negative inflection point for fixed returns. Unbundling regulation has traditionally lowered fixed input costs for the service providers but NBN now assumes control of the last mile and, as a result, marginal cost curves lift materially for Telstra and service providers such as TPG Telecom ((TPM)), UBS maintains.
 

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article 3 months old

Netcomm Wireless Taps US Potential

-Major US telco signed
-Additional Oz opportunities
-Positioned to win global contracts

 

By Eva Brocklehurst

Netcomm Wireless ((NTC)) has become a specialist supplier of communications hardware in machine-to-machine (M2M) markets, moving away from the traditional broadband business.

Canaccord Genuity makes this observation while initiating coverage on the stock with a Buy rating and expects significant earnings growth over FY16-17 as sales to the fixed wireless National Broadband Network roll out.

The company has hardware which is required at the premises where the NBN connection is made as part of the regional/rural fixed wireless broadband network. Take up rates are expected to rise substantially.

Netcomm has also signed up a major telco in the US to its fixed wireless technology. Canaccord Genuity presumes this is AT&T. Winning this business is important and has potential, in the broker's view, to transform the company.

Up to 13 million homes in the US could be installed with the company's hardware, as suggested in the AT&T submission as part of its takeover proposal for Direct TV. Canaccord Genuity takes a more conservative position and assumes 11 million homes with an eventual take up rate of 42% by 2023.

A number of the details are still unclear but the broker attempts to model the opportunity, resulting in a $3.96 valuation and target for Netcomm. On this basis Netcomm is expected to generate cumulative revenue of $1.04bn and gross profit of $144m by 2022. This goes a substantial part of the way to underscore the importance of Netcomm's business and positions it to win further contracts globally, in the broker's view.

Canaccord Genuity maintains that the process to establish communications between machines/devices and remote systems is a long-term development and the stock offers the leverage in a small way to this process.

The broker considers investors receive a free option on current valuation if the company scores additional contracts in the M2M market. Canaccord Genuity expects gross profit of $9.9m in FY16 and $20.1m in FY17.

A number of additional opportunities are potentially accessible in Australia, include servicing regional towns that fall win the range of fixed wireless coverage but are scheduled to be covered by fixed line, and the ability to service 80-150,000 homes on the urban fringe, potentially accessible after NBN Co acquires the 3.5GHz spectrum.

The broker does acknowledge it is easy to view the earnings profile as one-off but, as with most technology hardware, there is a natural replacement and upgrade cycle. Canaccord Genuity believes Netcomm is well placed to capture a proportion of this business and this justifies capitalising the sustainable earnings of the business. Risks include variations and delays in the take up of hardware.

Netcomm commenced business in communications hardware with its first products relating to dial-up modems. More recently it has evolved to cellular devices. The company no longer sells consumer products directly but instead supplies to telcos. The types of devices which use the company's M2M hardware include security cameras, vending machines and ATMs.
 

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article 3 months old

Hot New Potential In Tech Sector

-Cyber security commands premium
-Imperative capital is raised for growth
-Revenue generating preferred
-Or on verge of commercialisation

 

By Eva Brocklehurst

Foster Stockbroking has signalled out some key opportunities in its quarterly review of Australian technology stocks, believing the sector has the potential to power ahead. The broker does not provide formal coverage on some of these stocks but aims to offer additional investment ideas.

Foster believes there is a strong investor appetite for IPOs (initial public offering) in the technology sector, with Jayride, VFILES, Vizalytics and KYCkr all looking to list on ASX in the next few months. While the tech sector's enterprise value/sales ratio of 3.9 has contracted over the quarter since August's 4.7 measure, the broker believes this is because markets have generally been skittish and does not actually reflect on the sector.

Moreover, the cyber security segment now commands the highest premium in terms of price/earnings and enterprise value/sales ratios at 50 and 7.2 respectively, with ongoing concerns over hacking an security breaches raising awareness.

Recent share price pullbacks in both 1-Page ((1PG)) and Reffind ((RFN)) puts the two stocks at attractive entry points, given the broker envisages no major change to their business models.

1-Page had a strong run up until October ahead of the pullback but Foster retains a Buy rating and $6.15 target, believing valuation remains attractive, given the shares are 24% below the sector average and the company is in the early stages of rolling out commercially.

Reffind has commercialised a smartphone app (application) which facilitates more efficient and effective communication between management and employees. The company has already enjoyed its first contract win, after signing a channel partner agreement with TurboRecruit, which promotes Reffind to its 7,000 users. Foster recently initiated coverage with a Buy rating and $1.70 target.

Activistic ((ACU)) is moving ahead with the roll-out of its charity apps and the signing onto its first vertical in the US, Veterans Call. The company generates revenue by charging a fee as a percentage of the money donated.

AHAlife ((AHL)) is gaining ground in e-commerce as a market place for luxury, curated consumer products and the broker expects it to set up more partnerships with high-end consumer retailers while its gifting app is expected to drive growth further.

Meanwhile, Medibio ((MEB)) is providing a solution to assessing mental health issues via its heart rate diagnostic tool. The broker anticipates high operating margins with a highly scalable data processing operation.

Norwood Systems ((NOR)) has been providing landline-quality mobile calls to international travellers, at a compelling price relative to international mobile roaming. The company’s app is enjoying extremely fast mass market additions since launch on July 31, the broker notes.

Foster has a blueprint for investing in tech companies. In addition to an attractive starting valuation it is imperative that companies seeking to list are raising capital to accelerate rather than create their business. Investors should focus on those listings where the companies are preferably generating revenue or are on the verge of commercialisation, the broker instructs. The market opportunity should also be large and an international focus is crucial.

Other stocks on the watch list include Dubber ((DUB)). The company provides subscription-based call recording, recording management and access to recorded calls from anywhere in the world. The customer proposition is compelling to the broker although the stock is not covered formally.

Covata ((CVT)) carries the broker's Speculative Buy rating and a 58c target. The company provides organisations with the tools to secure sensitive data wherever located. Foster has a high conviction on companies exposed to data security, storage and analytics. The broker expects telco reseller deals to be announced by Covata in coming quarters.

Freelancer ((FLN)) has a Buy rating and $1.93 target and the broker expects material profitability in FY18, with the company expected to reinvest revenue in hiring engineers an scientists over the next two years.

Value exists in Invigor (IVO)), Foster maintains, with a target of 11c and a Buy rating. The next catalyst is expected to be evidence of marked increase in downloads for Shopping Ninja.

Two others which the broker does not formally cover but are considered to be noteworthy are KnoSys ((KNO)), which transforms a lot of company data into usable knowledge regardless of the range of IT systems, and iSignthis ((ISX)), which provides dynamic verification of identity and financial transactions globally.

Other upcoming IPOs the broker is on the look out for are TopBetta (proposed ticker TBH) and ShareRoot (proposed ticker SRO). TopBetta is the first fully operating Australian player in the fantasy wagering and social gaming segment. ShareRoot is based in Silicon Valley in the US and has created a platform to source user generated content from social media, allowing the companies to drive sales and increase brand awareness.
 

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article 3 months old

Brokers Welcome NextDC’s New Expansion Phase

-Value in the longer term
-Competitive advantage
-Morgans cites positive research

 

By Eva Brocklehurst

Systems integrator and data centre provider NextDC ((NXT)) is on the threshold of building two new data centres in Melbourne and Brisbane. The company has finalised $220m in funding via $100m in unsecured notes, $70m in a rights issue and $50m in an institutional placement.

The initial investment phase in the projects will include obtaining land, building the centres and 3MW of installed capacity. Both centres should be commissioned in FY17. Management has confirmed its FY16 guidance at the announcement, with earnings of $25-28m and capex of $115-135m expected.

Obviously the large up-front investment and initial losses are not overly appealing, UBS acknowledges, but this is only from a short-term perspective. The broker believes investors should focus on the merits of the centres over the life of the investment. The net impact in the short term is a reduction in the broker's earnings per share forecast of 149% in FY16, 46% in FY17 and 24% in FY18. Still, UBS believes value is added over a longer-term analysis.

UBS estimates total costs, including building and fit-out, will be $432-457m. Longer term, the broker estimates that, under active 90% utilisation, the two centres will generate a combined $126m in earnings, with a blended margin of 75.5%.

The broker incorporates the two centres and the funding into its models. Assuming a 25-year life and no residual value UBS estimates a project internal rate of return of 13.8%, well in excess of estimated cost of capital. Allowing for the value of land and 40% replacement fit-out costs the return increases to 14.2%.

What this means, UBS maintains, is that the two centres create shareholder value and strengthen the company's competitive advantage. Hence, the broker has a Buy rating on the stock with a price target of $3.25, based on a 25-year valuation.

Ord Minnett, not one of the brokers monitored daily on the FNArena database, also believes near-term capex appears covered, although details such as location and possible anchor tenants have not been revealed. There is a change in strategy, the broker notes, with the company citing a benefit in owning the land and buildings, potentially lowering funding costs but with a trade off in terms of higher capital intensity and lower returns.

The broker notes the risk profile reverts back to the company's build and ramp phase but the scale of the proposed facilities are substantial compared with previously. Ord Minnett also suspects NextDC is signalling an intention to increasingly sell white space, which, given its lumpy nature, makes forecasting the ramp-up profile more challenging.

The broker is a strong supporter of cloud computing, and the company's Microsoft leverage, but is not particularly attracted to NextDC's free cash flow profile, which does not, on Ord Minnett's calculations, turn positive until FY20. Still, the broker upgrades to Hold from Lighten, given near-term capex is funded and there is modest upside to the target, revised to $2.80 from $2.33.

Citi is not troubled by another large capital raising and considers the prospect of the new data centres as an evolutionary step, positioning the company well for the years ahead as the leader in this industry.

Morgans, while not yet commenting on this particular announcement, conducted some research a month ago, given data centres are a relatively new asset class in Australia. The research was positive in that the financial metrics and reward were revealed to be even more positive than previously thought. Hence, Morgans believes the next build is a highly attractive proposition and the shares are undervalued.

FNArena's database has three Buy ratings for NextDC. The consensus target is $3.24, suggesting 40.7% upside to the last share price.
 

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article 3 months old

Weekly Broker Wrap: Equity Strategy, Wealth, Media, Rhipe, SpeedCast And A-REITs

-More growth outside top 20 stocks
-AMP, IOOF managing costs better
-Nine more likely acquirer of regionals
-GPT a leader in retail A-REITs

 

By Eva Brocklehurst

Equity Strategy

Deutsche Bank contends that policy uncertainty has eased in China and this uncertainty has been previously one of the negatives for equities. With growth expectations now pared back there is scope for some upside surprise for equities.

The broker considers Australian equities are reasonably valued, with the market having already experienced a large correction this year. History suggests that, at this point, a solid bounce will occur, should no recession ensue.

Stock picking should matter more now and Deutsche Bank highlights five conviction picks: AGL Energy ((AGL)), Aristocrat Leisure ((ALL)), Iress ((IRE)), James Hardie ((JHX)) and Qantas ((QAN)).

The broker's contrarian idea – defined as unloved stocks screened for valuation and performance – includes WorleyParsons ((WPL)), Navitas ((NVT)), Computershare ((CPU)) and Nine Entertainment ((NEC)).

UBS finds considerably more growth exists outside of the top 20 in the ASX200. The top 20 leaders may notionally have attractive dividend yields but the question is whether there is enough growth. This suggests less reliance on indexing the Australian market and more on active equity positioning, the broker believes.

Growth outside the top 20 does come with a higher price/earnings ratio and lower dividend yield, admittedly, but UBS notes attractive themes, such as US dollar earnings, are also well represented in the 21-100 segment of the index.

Insurance

UBS reviews key metrics for wealth management and life insurance stocks in the wake of the bank earnings reports. Both AMP ((AMP)) and IOOF ((IFL)) are subject to similar margin pressure but the broker observes they are managing the cost side with greater success. The broker continues to like AMP given reasonably defensive earnings and fewer headwinds versus other financials.

Specific commentary on claims and lapses remains mixed. The broker suspects different levels of conservatism are represented across many company and analyst assumptions, amid persistent volatility. In this context, AMP's hike in income protection claims in the September quarter is unsettling but not yet raising material concerns.

Media Ownership

With press speculation around potential media law reform, UBS takes a look at the two main rules which may be tweaked or abandoned and the impact on key stocks.

The 75% reach rule, which prevents consolidation of metro and regional TV broadcasters, if abolished, would likely put the spotlight on regionals, given the synergies if they were to merge with metro counterparts.

Nine Entertainment with its strong balance sheet is considered a more likely acquirer of regional TV than either Seven West Media ((SWM)) or Ten Network ((TEN)).

The 2-out-of-3 rule (cross media ownership) limits certain operators from acquiring a third regulated media platform and, if this were abolished, certain parties would gain greater merger flexibility. Nevertheless, UBS questions whether print/radio players would be that interested in acquiring TV assets or vice versa.

Rhipe Ltd

Ord Minnett initiates coverage on Rhipe ((RHP)) with a Buy rating and $1.95 target. The specialist software distributor sells cloud licences to IT service providers. The stock offers capital-light leverage to the transfer of software consumption to the cloud.

The broker considers the company has an early mover advantage and key vendor relationships (Microsoft) which will enable it to participate well in the sector and gain market share.

Rhipe also has a deep understanding of the market and this provides greater confidence in a scalable business where the target market is growing at around 27%. Ord Minnett expects a 38% compound growth rate over the next eight years.

SpeedCast International

Canaccord Genuity recently visited the US to gain an insight into the satellite communications industry, specifically in terms of the oil & gas industry, meeting with players involved such as equipment suppliers and technology developers.

The broker is now excited about the opportunity before SpeedCast International ((SDA)), believing the company can maintain strong organic growth which should continue to be supported by acquisitions. Reflecting the beneficial trends, Canaccord Genuity maintains a Buy rating and increases the target to $5.27 from $4.40.

Retail A-REITs

Quality and location continue to drive the retail segment of Australian Real Estate Investment Trusts (A-REITs), Credit Suisse maintains. The broker asks, if system growth decelerates, where is the relatively better performance going to come from?

Victoria and NSW remain the main regions for growth. Discretionary spending remains elevated versus staples, so apparel is to the fore while supermarkets are on the back burner.

As a result, GPT Group ((GPT)), with its skew to higher quality assets and 84% exposure to the above two states, is considered the leader in the field. Credit Suisse expects GPT and Scentre Group ((SCG)) to have higher comparable net operating income growth into 2016.

The broker notes Charter Hall Retail ((CQR)) is in the process of acquiring a sub-regional asset in NSW on a 6.7% cap rate – the ratio of asset value to producing income - and this presents some value. The avoidance of stamp duty, given it is a related party transaction, is considered highly beneficial.
 

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article 3 months old

Amaysim Confident In Pricing Despite Competition

-Price reductions to main plans
-Some revenue pressure acknowledged
-Opportunity seen in industry consolidation

 

By Eva Brocklehurst

Amaysim Australia ((AYS)), has launched more competitive mobile plans, viewed by brokers as a sign of the strength of its wholesale contract with Optus and sustainability of its business model in the face of increased competition.

The main changes to the company's plans are reductions in price for the unlimited 5GB and 8GB plans and addition of 300 minutes of standard international calls to its $44.90 5GB plan. Guidance has been reiterated for FY16, with unit revenue pressures expected to be offset by lower operating expenditure.

Goldman Sachs believes the more competitive plans will reduce the risk of margin pressure from rising data usage. The new plans are expected to be negative for near-term revenue but should be offset by increased penetration of unlimited plans, greater up-selling and improved subscriber growth.

The broker reiterates a Buy rating, predicated on strong earnings growth (FY15-18 expected to be up a compound 49%) and a supportive valuation. Goldman also believes the stock offers long-term value as either a target or as an acquirer of other telcos. Goldman's target is $2.95.

Macquarie, too, believes this is an improved competitive offering that will re-instate amaysim as a value leader in the segment, but will place some pressure on revenue. The new plans are expected to reduce amaysim's exposure to increased data consumption from customers over time, Macquarie notes. The broker suspects Optus will absorb around 70% of any revenue per unit hit from the new pricing in its wholesale business.

The company also maintains that, despite the revenue pressure, earnings in FY16 will be supported by rising online customer engagement and operational efficiencies. Essentially, Macquarie envisages amaysim is expecting that cost reductions will provide a buffer amid a structural shift to online interactions.

Macquarie also suspects there is an opportunity for amaysim to pick up additional subscribers as TPG Telecom ((TPM)) transitions its MVNO (mobile virtual network operator) base to Vodafone in a deal which also extends its fibre network. Amaysim may also benefit from any fall-out emanating from Yatango Mobile entering administration.

The broker makes no material changes to FY16 estimates but has downgraded its rating to Neutral from Outperform, given the stock's recent strong performance. Target is $2.45.

See also, Stellar Performance Expected from amaysim on August 4 2015.
 

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article 3 months old

Weekly Broker Wrap: Small Caps, El Nino, Telcos, Slots And Warehousing

-Domestic economic tailwinds elusive
-Insurers benefit from El Nino
-Value adding to mobile plans continues
-Aristocrat dominates slot machines
-Warehousing growth to benefit GMG

 

By Eva Brocklehurst

Queensland Conference

Morgans notes domestic tailwinds are more elusive than usual at its Queensland conference, which featured 36 companies across several sectors. Housing and service sectors are working hard to take up the reins after the mining boom while Australia is navigating a period of soft growth.

Several businesses, such as IPH Ltd ((IPH)), Silver Chef ((SIV)) and Lovisa ((LOV)) are looking to grow offshore, while AP Eagers ((APE)) is seeking innovative digital strategies to grow its market share in the automotive industry. Meanwhile, enablers of digital technology such as Rhipe ((RHP)) and NextDC ((NXT)) are obtaining benefit from the way corporates handle and store data.

The broker notes Australian food products are being sought from exporters such as Capilano ((CZZ)) and, indirectly, Elders ((ELD)). Inbound tourism also appears to be thriving and driving expansion for Echo Entertainment ((EGP)) and Mantra Group ((MTR)).

Morgans believes, over the next 40 years, as the population ages, demand will increase substantially for health care, travel and wealth management. Servicing this model are Flight Centre ((FLT)), Gateway Lifestyle ((GTY)) and Japara Health Care ((JHC)).

Morgans highlights AP Eagers, Aveo Group ((AOG)), IPH and Vitaco ((VIT)) as its key selections from the conference.

El Nino

This summer promises one of the strongest El Nino events since 1950, with a large negative impact being widely canvassed for eastern seaboard harvests. The impact of El Nino on rain and temperatures varies by region but Macquarie highlights, with a few notable exceptions, the insurance sector is more favourably placed.

In general, capital goods companies are negatively impacted, regardless of region, while materials sector companies have mixed fortunes. This does mask differences, the broker concedes, between those companies with exposure to hard commodities and those with exposure to agriculture.

Specifically, companies facing downside risk include Incitec Pivot ((IPL)) and Nufarm ((NUF)) as materials suppliers. GrainCorp ((GNC)) and Murray Goulburn Unit Trust ((MGC)) would be adversely impacted by reduced yields.

Bell Potter suggests the good news from an El Nino event is for lower insurance losses and the strong event that is forecast for this summer may signal loss ratios could be down to almost 60%. The event means lower rainfall and delayed tropical monsoons .This signals increased bushfire risk but fewer cyclones.

The broker also observes there is very little correlation between El Nino and bad debts in agribusiness. While isolating flood and drought impacts is difficult, Bell Potter believes floods tend to have a larger adverse impact on banks.

Assuming the El Nino arrives and increased hail activity, which is also a feature, is not concentrated in metro/CBD regions, the broker's analysis indicates very little impact on the insurers and banks in general.

Telco Pricing

Telstra ((TLS)) has raised handset subsidies on 24-month plans this week, by reducing iPhone 6S handset pricing. Goldman Sachs believes Telstra is responding to increased competition since the iPhone 6S was launched. This heightened competition, if sustained, could be negative for industry margins, the broker suspects.

Telstra also continues to add value to its plans in fixed broadband, with bonus data and the inclusion of Telstra TV on $119/$149 plans. The broker observes telco advertising spending grew 12.5% in September, versus a slump of 2.8% for the broader advertising market.

Slot Machines

Aristocrat Leisure ((ALL)) continues to dominate gaming machine performance in the September quarter, with UBS noting it was performing well ahead of its peers. The company appears to be retaining its installed base market share across the eastern seaboard.

New products from Ainsworth Game Technology ((AGI)), IGT and Sci-Games have entered the market and it seems to the broker, while early days, that Ainsworth's games are gaining traction ahead of the other new entrants. Ainsworth is growing its installed base share at the fastest pace relative to peers, although UBS observes momentum has slowed.

UBS estimates Australia will represent around 16% of Aristocrat's segment earnings in FY16, versus 27% in FY14, but it remains an important market, being the second largest regulated class III video slot market behind North America.

Warehousing

Demand for modern warehousing is a global growth trend which Macquarie notes is led by three key operators, Prologis, Global Logistic Properties and Goodman Group ((GMG)).

Goodman is Macquarie's preferred stock to play the theme as it has a well managed capital structure, geographic diversity and superior returns. 2016 supply additions in Japan will be at the highest level in 10 years.

Despite a spike in vacancy rates and decline in spot rents, Macquarie is not concerned about the impact because of Goodman's approach to staging additional supply. Similarly in China, while supply is set to accelerate, net absorption is also likely to remain high.

In the current environment, Macquarie observes Goodman offers higher free cash flow and dividend yield versus Global Logistic, which is listed in Singapore, although the latter is considered more attractive on a relative net asset valuation.
 

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MyNetFone Invests In Growth

-Guidance downgrade due to intangibles
-Adding 50 more staff over 12 months
-Momentum in new business continues

 

By Eva Brocklehurst

MyNetFone ((MNF)) continues to invest in growth. At its AGM the company revised down FY16 profit guidance, largely to incorporate amortisation charges in relation to the acquisition of Telecom New Zealand's global wholesale voice business, completed in April.

Canaccord Genuity notes, excluding the impact of intangibles, guidance implies profit of $9.4m. The broker revises earnings estimates for FY16 down by 2.9%, largely because of the ongoing investment in personnel for further growth.

The company has signalled that the new business continues to show positive momentum with customer growth of 8.0% in the first six months since acquisition. The broker highlights a lag of 3-6 months in delivering revenue benefits.

It appears the company is adding around 50 extra staff over the next 12 months in engineering, sales and operations. The broker has no concerns regarding the longer-term opportunity for MyNetFone and a Buy rating and $4.05 target, reduced from $4.20, are in place. The company has guided to earnings of $17.3m in FY16.

Canaccord Genuity's capital expenditure assumptions remain in line with guidance of $5m for FY16, which should fall to around $2m in FY17. Guidance includes a non-cash amortisation charge of $1.4m in FY16. On an adjusted basis FY16 and FY17 earnings per share are forecast at 14c and 18.9c respectively.
 

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article 3 months old

Spark NZ Steps Up Digital Technology Strategies

-More emphasis on digital growth
-Caution over medium term outlook
-Morgan Stanley questions Lightbox

 

By Eva Brocklehurst

Spark New Zealand ((SPK)) is positioning to exploit its key markets of mobile, broadband and communications technology to offset a decline in its legacy voice network. The company updated analysts at its recent strategy briefing, signalling that its formula may not have changed at the top line but better growth should come from mergers, investment in adjacent technology and market share gains.

For the first time in years, Morgan Stanley observes the company provided an aspirational goal of 0-2.0% growth in revenue over FY15-18. This is to be driven by market share gains in mobile, holding share in broadband, capturing a share of transitions to the cloud and selective acquisitions. Capital expenditure is to be maintained at 10-12% of sales. The Digital First program is expected to deliver around NZ$150m in earnings benefit over the next three years.

Productivity gains remain necessary, UBS observes. The company's ambitions for broadband and mobile are broadly in line with the broker’s forecasts. The source of upside is with platform services, and the cloud, which is expected to grow at 11-14% per annum, with considerably higher margins.

The broker believes the company is executing exceptionally well but remains cautious about the magnitude of growth. New Zealand earnings forecasts stagnate from FY18, as operating expenditure reductions fade away. Still, positive news flow and a prospective cash yield of around 8.0% continues to support the stock, the broker observes.

There was further insight into where the company expects earnings growth to come from along with a refinement of its mobile strategy, Credit Suisse notes. The company remains confident in the near term outlook for earnings and dividends but was light on specifics for the medium term.

The broker acknowledges the company is cautious about the extent that cost savings can be retained in a competitive market while investment into new ventures is not expected to contribute for some time. Hence, Credit Suisse envisages somewhat of a discrepancy emerging between strong top line growth and cost cutting potential and how this translates to greater earnings growth.

A stabilising regulatory environment and a return to revenue growth were positive features of the briefing, and considered supportive of Morgan Stanley's Overweight call, although industry feedback suggests to the broker there is an elevated level of competition in mobiles and broadband.

Retaining share in broadband could provide difficult, Morgan Stanley observes, with CallPlus and Trustpower continuing to win share and MyRepublic entering the industry. Cost cutting remains the driver of earnings growth and Morgan Stanley suspects the company could extract another NZ$50-70m in reductions over the next two years.

The broker does question the company's belief that Lightbox is improving its brand, driving data growth and potentially increasing the lifetime value of its broadband customers. This runs counter to Morgan Stanley's feedback, which suggests acquiring media content to drive data growth is risky. The broker believes Lightbox should be shut down and there would be a potential uplift to free cash flow and earnings of 5-6% if this occurred.

The main variation from Deutsche Bank's outlook is the company's 3-year outlook for broadband growth. The digital offering is intent on capturing the share of spending that is moving to consumption based cloud and platform services from the traditional capital intensive information technology.

While this offers potential, the issue for the broker is the pressure that continues on the traditional telco services. That said, Deutsche Bank notes management's plans to work in its digital offering more closely with its Connect business to improve efficiency and customer solutions. All up, there are better outlines of priorities and challenges but not enough to make the broker change estimates materially.

FNArena's database has one Buy rating for Spark NZ (Morgan Stanley) with five others rating the stock Hold.
 

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